Abu Dhabi, UAESaturday 14 December 2019

Real assets resurgent as return on financial holdings now too low and too risky

While the key income-producing asset is real estate, investors can also consider the energy sector, space, transport and agriculture

Richard Branson, founder of Virgin Galactic, on the floor of the New York Stock Exchange to promote the first day of trading of Virgin Galactic Holdings shares. The move may help to create a multi-trillion dollar space sector in the US stock markets. Getty Images
Richard Branson, founder of Virgin Galactic, on the floor of the New York Stock Exchange to promote the first day of trading of Virgin Galactic Holdings shares. The move may help to create a multi-trillion dollar space sector in the US stock markets. Getty Images

From time to time investors should all watch the launch of a SpaceX rocket and wait for its booster rockets to land safely back on earth.

This is an almost miraculous combination of cutting edge technology and the law of gravity. Seemingly the impossible has become possible. You are also looking at the bigger picture: planet earth, big money and economic returns.

Back on earth investors are facing a more immediate problem, one that could cost them far more than they could ever hope to make in space ventures, at least in the near term.

Peter Cooper

For learning how to fly into space on a budget will likely result in the creation of a multi-trillion dollar space sector in the US stock markets. Virgin Galactic — Richard Branson’s space craft tourism venture backed by Abu Dhabi’s Mubadala — became the first listed stock in this space last month.

When Mr Branson launched his venture in Dubai at a press conference over a decade ago he asked the assembled journalists: "Who wouldn’t want to go into space?" Only my hand went up.

However, back on earth investors are facing a more immediate problem, one that could cost them far more than they could ever hope to make in space ventures, at least in the near term.

The majority of investors currently have their wealth tied up in financial assets, that is to say stocks, bonds and cash.

While in the short run cash-is-king in a recession, in the longer term it always loses to inflation, devaluation or both, because central banks gradually devalue money to wipe national debts.

US 10-year treasury bonds yield just 1.95 per cent. That is next to zero when adjusted for inflation and taxes, and bonds have a similar devaluation risk to cash.

Share dividends are benchmarked against this low yielding 10-year treasury bond. The S&P 500 index of top US stocks has a paltry average dividend of 1.8 per cent.

Meanwhile, the cyclically adjusted price-to-earnings ratio as created by Nobel Prize winning economist Rober Shiller currently indicates that US stocks are at their most overvalued in history, apart from before the dot-com crash in 2000 and Great Crash of 1929.

Then consider that if the stock market were to fall heavily in value the US Federal Reserve would slash interest rates, and that would bring bond prices crashing down as they move in the opposite direction to yields.

Perhaps then it is no wonder that global asset allocation has shifted away from financial assets and into real assets. Exposure has increased from 5 to 20 per cent since 2000, according to Brookfield Asset Management.

Real assets are a diverse bunch of income-producing fixed assets. By far the most important is real estate — residential, offices, industrial, hotels and retail.

But other subcategories include: energy pipelines, forestry, agricultural land, airports, railways, highways, windmills, solar farms, shipping and mines, and yes space travel.

The crucial point about such real assets is that they are significantly undervalued in comparison to financial assets, and offer a higher income stream.

For example, a well-located US office tower pays around 6 per cent in rental income and increases in value by say 3 per cent annually, and with bank debt leverage that total return could be 12 per cent. Those picking up bargains in the UAE property market may be able to do better than this in a market upturn.

Taking the five-mile-out-view, this is an investment trend for the future. Real assets are already a $50-60 trillion market and analysts say that amount could double in 10 years.

This swing will likely be driven by a continuation of low interest rates for longer than expected, perhaps after a major stock market event. And as more money moves into real assets the percentage return that they offer will decline and their value increase, just as happened with financial assets over the past two decades.

The most difficult thing is to decide what, when and where to buy. This is a very diverse array of investment opportunities, and not everything that glitters will turn out to be gold.

In addition, it will almost certainly be better to buy these assets after a stock market correction rather than before it. A falling tide will sink all boats. So how can the average punter invest?

The creation of more than 200 Real Estate Investment Trusts has made it easy to be a passive investor. Three real estate exchange traded funds tipped by Forbes recently are: National Health Investors (NHI), Crown Castle International (CCI) and Duke Realty (DRE).

For windmills there are speciality funds like Brookfield Renewable Partners (BEP) and Hannon Armstrong (HASI). You can buy into energy pipelines with listed vehicles such as Energy Transfer (ET) and Magellan Midstream Partners (MMP) or buy shares in quoted airports and highway operators.

Timber and Farmland Reits like Farmland Partners (FPI) and Weyerhaeuser (WY) offer exposure in this sector; and the VanEck Vectors Gold Miners ETF (GDX) is a popular risk diversifier.

Peter Cooper has been writing about Gulf finance for two decades

Updated: November 17, 2019 10:40 AM

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